Tsinghua_2005MBA_Lecture_10(Market power).ppt

Chapter 1 Lecture 10 Market Power: Monopoly and Monopsony Topics to be Discussed Monopoly Monopoly Power Sources of Monopoly Power The Social Costs of Monopoly Power Topics to be Discussed Monopsony Monopsony Power Limiting Market Power: The Antitrust Laws Perfect Competition Review of Perfect Competition P = LMC = LRAC Normal profits or zero economic profits in the long run Large number of buyers and sellers Homogenous product Perfect information Firm is a price taker Perfect Competition Market Power A market, or industry, in which individual firms have some control over the price of their output is imperfectly competitive. All firms in an imperfectly competitive market have one thing in common: They exercise market power, the ability to raise price without losing all demand for their product. Imperfect competition and market power are major source of inefficiency. Imperfect competition does not mean that no competition exists in the market. In fact, in some imperfectly competitive markets competition takes place in even more arenas than in perfectly competitive markets. Firms can differentiate their products, advertise, improve quality, market aggressively, cut prices, and so forth. Monopoly Monopoly 1) One seller - many buyers 2) One product (no good substitutes) 3) Barriers to entry Barriers to Entry For a firm to exercise control over the price of its product, it must be able to limit competition by erecting barriers to entry. A number of barriers to entry can be erected: 1. Government franchise. 2. Patents. 3. Economies of scale and other cost advantages. 4. Ownership of a scare factor of production. Monopoly The monopolist is the supply-side of the market and has complete control over the amount offered for sale. Profits will be maximized at the level of output where marginal revenue equals marginal cost. Assumptions of the Pure Monopoly Model If a firm is to behave as a pure monopolist, it must be satisfied the following two stringent assumptions